tv Bloomberg Real Yield Bloomberg January 6, 2018 10:00am-10:31am EST
♪ jonathan: from new york city for our viewers worldwide, i'm jonathan ferro. with 30 minutes dedicated to fixed income, this is "bloomberg real yield." ♪ jonathan: coming up, u.s. payrolls disappoint, wage growth stalls, and unemployment sticks at 4.1%. analysts say one week of an expected jobs report is unlikely to derail the federal reserve. growth rich inflation poor. the economic data in europe looks hot, but inflation cools. we begin with a big issue -- the payrolls report. >> it isn't bad. i wouldn't overreact to this report. >> growth in the jobs market is solid. >> disappointing in many ways.
>> a .3% increase in wage growth. you to look at the rounding, 2.5% over the last 12 months and we could still be a path of up to 3% so that would be a sign of improvement in the job market. >> the job creation is fine. the wages was .3 with the revision down to .1 so a .2% per month. that is what we are really looking at. if you can get wages going, you can get inflation going, which is what the fed wants to get going. >> i do think you are seeing both pretty solid labor market that's not necessarily extremely overheating, but it's a good thing for markets and equities. >> this is not a labor market humming along. it is certainly not consistent with needing to raise rates. and i think it pushes the fed possibility of raising back. this is a labor market that potentially looks like it's beginning to slow. >> the labor market is actually really hot, but the run rate for job growth is below 100,000 probably, so anything above that to me is taking away the slack
in the labor market. >> the labor market is not hot. it's not humming. it's slowing and relatively weak. >> as the economy continues to grow, and as the labor force continues to tighten, remember the unemployment rate is still 4.1%, a 17 year low. we are going to see real wage pressure here. jonathan: joining around the table is michael the head of , rate strategy at rbc strategy, kathy jones, and christian memani.krishna kathy, hot or cold? do you want to jump up to the debate and help us out? what is it? kathy: i think it is warm. it is solid, moving along. you only need 100,000 or less jobs to keep diminishing the slack in the labor market. overall, there was some good news. the purchaser -- participation rates for workers prime age is
moving higher and it's well above where it's been the last five or six years so that means people are coming back to the labor market and things are moving along. krishna: even from markets perspective if it's classified as not so hot, it doesn't matter. enough momentum in the economy and the tax cuts are coming so on the back of it, the markets will see through. that's what they are doing. after the initial debt, yield is back up. at the end of the day, the economies on a global basis are doing well. jonathan: michael, your thoughts? michael: i'm in line with krishna. the big news about this is change in sentiment in the markets. a year ago everyone would've been looking for the worst-case scenario out of every report. jonathan: or at least for the fed not to do something. michael: where now we move for five minutes and the markets go right back to where they were. people are looking beyond any weakness. jonathan: travel below 50 basis points for a little while. what were your thoughts when that happened? how far do the spreads get?
krishna: i think that trend will continue. looking for steepening in this environment is a fool's game in my personal opinion. the reason that is the case is because, i think if there is true inflation, then markets will anticipate that the fed is going to slam on the brakes really hard and we are talking about a recession in the not-too-distant future. for a tiny bit, we may see steepening. overall, a flattening trend. jonathan: is it a fool's trend? kathy: a little bit of steepening would not be too surprising. the only reason that they are , the long and has been stuck. i think we get longer-term yields to grind a bit higher and more supply that has to be absorbed by the market in 2018 and beyond. i wouldn't be surprised to see a moderate amount of steepening. jonathan: do you see any of that? krishna: absolutely, and we
might see steepening, but i don't think it lasts. with inflation reappearing, the markets would anticipate a faster normalization and therefore a recession to get back to where we were. jonathan: some stellar data with the pmi in europe, but then the inflation data is not tracking what i'm seeing into the output numbers whether it soft sentiment surveys, or the hard gdp figures for labor market numbers. you would expect to see that and on the other side higher inflation numbers. you don't. why not? michael: that's one of the great mysteries. of the last few years. we think we will see higher inflation but nothing dramatic, just a small uptick going forward. that said, we do think those inflation fears and more importantly the supply issues that you mentioned. in the past two years, supply has not mattered at all. we have gone from $4.5 trillion of debt outstanding in mid-2008.
government debt outstanding. trillion in the middle of this year. just because we're not seen that pressure yet means you can go further and further out forever. we will be adding about $1 billion of additional debt every year for the perceivable future. at some stage, people will have to start to pay attention to that and we will have to have some term premiums come back and the curve steepening in here. i think the next refunding announcement in early february, we will see 30 year auctions increase and that is when people get scared about the supply issue. jonathan: i spoke to gary cohn earlier and he spoke about banking. and deregulation. do you think there was a reason for the u.s. long end to sell off sharply if the banking deregulation bill kicks in and -- kicks in around q1? as suggested by gary cohn. kathy: i do not think it will happen very quickly. i think it will take some time for deregulation to work its way
through the system to produce the kinds of results that would cause the long end to sell off. in terms of all the regulatory changes and the tax changes, i'm more focused on the high-yield market at this stage of the game than i am about the financials. jonathan: we are going to talk about credit in just a moment, i do want to get your thoughts, krishna on the inflation dynamics. break even rates are picking up. are we thinking about inflation this year as a tale rift? do you need to hedge out or a base case that is going to materialize through this year? krishna: i think, as michael was saying, that's the great mystery. inflation would pick up a tad. i don't think it picks up a lot. if it picks up a lot, we will see a much more forceful response from the fed to get us into a recession. two phase that out. counting on breakevens picking up in a big way, i don't think it is in good context. jonathan: a really interesting note from jpmorgan and the basis
that's not coming. what is the catalyst to get term premium up and is it coming? krishna: i don't think it's coming. i think it's coming after recession and not before a recession. jonathan: kathy? kathy: i think there would have to be enough global growth to hold global inflation. there's been enough sluggishness to hold global growth throughout this last decade. for the first year in this decade, we have seen all the major countries growth the same -- countries grow at the same time. there is a lag effect with inflation. it could take a little while longer, but what worries me is the term premium is still negative. any surprise, the market is just not priced for it at all. krishna: her point is a really good one, which is that it has to come from overseas. the challenge there is an emerging markets, where you would expect this to materialize at this point, actually inflation expectations are relatively flat and that's one
of the reasons why emerging-market rates are so well anchored at the moment. jonathan: michael? michael: we had two pieces behind this flattening. one has been the low inflation and the fed creeping higher. that has been the long-term structural flattening. but then, since september, we just had this dramatic move in five 30's from 100 basis points to just above 50 basis points. that has been this extreme pension bid. some of that may be related to tax changes and we think that will fade as the years go on. we are expecting continued support for the long end early in the year, but then we think as that tension bid fades as the supply gears pick up. we think we will have that later this quarter. jonathan: michael cloherty, kathy jones from schwab and krishna. sticking with me. next, in a race with emerging market economy, the race for foreign capital. that's next. this is "bloomberg real yield." ♪
♪ jonathan: from new york city to our audience worldwide, i'm jonathan ferro. this is "bloomberg real yield." i want to head to the auction block now where we start with a little look into the crystal ball for 2018. about $680 billion of high-grade u.s. dollar denominated corporate bonds are due to mature before year end. led by the banks. this is likely to be a signal of who will lead issuance of 2018. outside the united states, there is a race among em countries to secure capital. this week mexico completed a debt sale totaling $3.2 billion, total amount reaching $15 billion. argentina sold $90 billion of debt with more than half of investors coming from north america. both countries taking advantage of the lowest borrowing cost in nearly a decade.
still with me around the table, michael clotherty, kathy jones, and krishna memani. i want to take the opportunity to talk about credit and i want to begin with you. something struck me about last year. junk etf, you risk assets to perform more broadly and junk lagged. it lacked em and my question is why? why is high-yield not keeping up with the rally you see in risk assets? krishna: the answer is simple. high-yield shares are just too tight. there's nothing magical about it. high-yield has had a substantial run over the last seven to eight years. we are at a spread level on the cbs indices of some 300, and it is difficult to get yourself to buy high level at that yield and feel good about it. kathy: i would agree with krishna.
spreads are tight and valuations are really high and the credit quality is deteriorating. then you add the tax bill onto it, which is not favorable for high-yield issuers. you just don't have a great case there to be made for being all in on high yields. jonathan: i asked bill gross about his exposure to high-yield and junk and whether he had any and what he would advise other to do. -- would advise others to do. have a listen to what he had to say earlier on bloomberg radio and bloomberg tv. >> i am not short high-yield. i am short hyg dx. spreads are very narrow and they follow the stock market. it is almost a one to four correlation. if the stock market goes up 1%, the spreads in the price of the cbx goes up by a quarter of that. jonathan: there is a huge difference between sitting here and saying 2018 is the year for coupon clipping. you're not going to get the capital returns you got over the last couple of years between that and saying i'm going to go short. krishna: i have an issue with what he was saying.
you know, i don't think high-yield spreads are very attractive, but expecting them to widen meaningfully, which is what you have to have to have a short position, i don't think is realistic either. high-yield is ok and you can clip the coupon, but they don't widen meaningfully. if they do, it's in the back half of the year rather than the first half. we have enough global economic momentum going into it that equities do well and high yields therefore does well. jonathan: i asked bill to clarify what are you looking to happen? his reasoning is the front end of treasuries. we will get this real pickup in a 2-year note and that at some time will test high yields. what levels are you looking for on a two-year treasury this year? we are pretty much at the 2% mark already. michael: we are looking at four rate hikes this year so we think there's further to go on that. we think they will get more rate hikes next year, too. we think we are going to
continue to see pressure on two's. the other issue on the front of the curve is that this tax bill may have impacts on investment grade also. you have over $2.5 trillion of trapped offshore cash that right now is largely invested in high quality u.s. fixed income assets. when that money comes home, it is likely to be diverted to other purposes. so you have got this massive buyer base and you just don't have a $2.5 trillion shift in investment mix without leaving a mark. jonathan: they are also the big buyers and the big issuers. when you net that out what are , you left with on the back of the repatriation story? kathy: i'm not really concerned about the repatriation because i think it may not be as massive as everybody expects. our past experience has been that it's been pretty modest. it has dragged. secondly, i think the balance will work itself out in the investment grade area. again, high-yield is another issue related to not only the
spreads but the tax bill and the ratios of interest expense being high. jonathan: that's got to mean something for credit, doesn't it? krishna: yeah, i hope michael is wrong. [laughter] i think markets hope michael is wrong. if that is the case, we're looking at a recession in the not so distant future. jonathan: you call that a recession risk? krishna: absolutely. if we get four rate hikes this year and we expect two to more three next year, i think we're looking at a recession. jonathan: the base case right now is three. an extra 25 basis points is the tipping point? krishna: i think with the base case of three, the expectation is the economy starts slowing down. if it's the case that michael is making, the u.s. economy is not slowing down. the global economy overall continues to do well and we go further in the path to normalization.
again, we don't expect a recession anytime soon. we continue to believe this will be the longest business and credit cycle that all of us have ever experienced. having said that, if his views come about, that's an issue. jonathan: michael, weigh in. michael: first, on repatriation. the difference between this time and last time, last time you'll got taxed on the money brought home. this time you get taxed whether you bring it home or not, so why would you not bring it home? and we think on growth, the only thing that will stop the fed is if we get massive movement in credit spreads. that will spook the fed and knock a rate hike out of the picture. that's the break on the fed. we do think we will see some periodic pressure on things, but a massive gap wider in risk assets and the fed stops. jonathan: i want to wrap things up. if you believe this could be the longest cycle ever, but you think spreads are too tight, then answer this: where do you take credit risks that will generate considerable capital
returns if this is the longest cycle? it can't be risk completely. krishna: if you're looking for capital returns, buy equity for god's sake. what credit is supposed to provide you at this point in the cycle is some level of income and not meaningful capital appreciation. we think within the credit markets, the most attractive asset class is emerging-market local debt. that is driven by their high level, high rate levels, plus the fact that the dollar remains stable or continues to weaken. that is really the best case i can make for that asset class. other than that, credit overall, if you clip the coupon, you can consider yourself lucky. jonathan: kathy, you have the final word here. kathy: i think most risk assets are highly valued and emerging-market bonds would not be my choice. jonathan: what would be? kathy: 26% of that is denominated in u.s. dollars and i think the dollar has some room
to move up. i would say at the shorthand in investment grade, i don't think there's a really great place to hide right now. jonathan: kathy jones, sticking with me from schwab and krishna memani from oppenheimer funds. i want to get you a market check of where treasuries have been. two's 10's and 30's as we go toward the end of the week. yields up on a two-year note by eight basis points to 1.96%. we are zooming into that 2% level. up on the long end as well by seven to 281. on a 30 year. still ahead, bank earnings in the united states and important data out of the americas coming at the back end of the week. that is coming up in just a moment. this is "bloomberg real yield." ♪
jonathan: this is "bloomberg real yield." i'm jonathan ferro for audience members worldwide from new york city. time for the final spread. coming up over the next week, we get a series of economic reports concluding on friday when we get cpi data and retail sales as well. plus, on the earnings side, it kicks off big time at jpmorgan and wells fargo. bank earnings start to come through. in politics, a lot going on is -- as always. keep an eye on the french president emmanuel macron as he heads over to china and talks in korea. something to keep an eye on as well. final thoughts with michael cloherty, kathy jones, and krishna memani. kathy, retail sales, psi, something you got your focus on? kathy: your usual for the time a month. decent readings on both. the important thing about cpi is that on a year-over-year basis, it's slightly higher for technical reasons. we had that big dip last year early in the year. if you are looking
year-over-year, it will actually outperform what most people's expectations are. jonathan: michael? michael: same. the regional sales data we have had, we had so much momentum recently, but even a soft month, you still have a very good quarter. an impressive gdp number. i think we will pay more attention to the inflation data. jonathan: at what point, michael, does that tax cut, i'm going to spend more money kick in? does it at all? michael: i think it does. normally, when you get tax cuts, it's coming out of recession and everyone's terrified and you don't spend the money. you get one at this point in -- and you are much more likely to spend. you will start to get withholding changes going forward so people don't start to see the cash immediately. it's really not until april of next year that people will see the big change in what's in their wallet. jonathan: krishna? krishna: the key thing to remember with respect to that is more corporate tax cuts where the impact is going to be muted to begin with. you will see it, but you will see it in a very faded way if at all.
from an inflation standpoint, retail sales standpoint, both of them are looking good at this point, but at the end of the day for the markets, it doesn't really matter. we firmly believe that the entire market firmly believes that we are in a growth momentum phase and whatever the data is, we will look through that. jonathan: is that the takeaway, really? krishna: don't pay attention to the economic data for the first half of the year. it's bad for a pontificator like myself, but good for the market. jonathan: let's get to the final round where we get your quick final thoughts and what through -- and whip through a couple of questions. we get through the growth poor story. is that regime here to stay -- yes or no? michael: yes. krishna: yes. kathy: yes. jonathan: two's, tens on treasuries, could we hit zero by year-end? michael: no. kathy: no. krishna: yes.
jonathan: final question. would you reduce high-yield exposure to zero, get out, or stay in? michael: stay in. kathy: reduce, but stay in. krishna: stay in. jonathan: my special thanks to all of you. thank you. michael, kathy, and krishna. that does it for us this week as we kick off a brand-new year in 2018. a happy new year to you. we will see you next friday at 12:30 p.m. new york time. 5:30 p.m. in london. this was "bloomberg real yield." this is bloomberg. ♪
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